Tag Archives: price-to-income ratio

Most of us have heard the term “housing bubble” and we know it has something to do with risky lending, contribution to the economy slump, and why the housing prices have dropped. But do we really understand what it was, how it worked, and why it hurt us? Here is the researched I have found.

So, actually this chart is from someone else’s research but I believe it to be pretty accurate considering the sources used. As it clearly shows, the American income has been pretty stable for awhile, not growing but not decreasing either. Notice, however, the constant increase in oil, an indicator to economy health. If oil goes up, so does the cost of everything else we purchase in stores because the cost of transportation is higher. Therefore, logically, we should not be increasing our expenses in other areas as well, but look again and notice that was not the case. In fact it was the extreme opposite, thus the bubble. More people buying more house than they can afford.

“It is bad for them (buyers), it is bad for the housing market and it is bad for the economy. The extra money that is being used to pay for housing is not going to other areas of the economy…the underlying factor in your ability to repay is your income.” – BergenJerseyForeclosures.com

In order for the economy to get back on its own feet, our price-to-income ratios have to decrease to about 3/1, that is the home value is 3 times more than annual income, this has not been the case, and sadly still isn’t. According to a recent study by Zillow noted in DSNews.com “Eighty-five of the 130 metros were still above their historic averages, while 42 were below.”

We are still in trouble, this is what we need to start doing… live within our means! Just because someone will let us increase our debts and take on huge payments doesn’t mean we should. We need to be smart with our money and budget because it affects our lives and our economy.

“I think it makes more sense to buy as much house as you need, keeping the conventional debt-to-income ratios as ceilings.” – GetRichSlowly.org. Everyone should be able to pursue the American dream and own a home, and with prices still dropping, most of us actually could with a consistent income. However, let’s stick with humble beginnings and just get what is affordable, not what is extravagant.